Automated Market Makers for Prediction Markets

Research and documentation on different AMM implementations in Solidity for prediction markets. Generously funded by Gnosis.

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Open-source MIT Licensed. GitHub v0.1.5

What are prediction markets?

Prediction markets are exchange-traded markets created for the purpose of trading the outcome of events.

What are Automated Market Makers (AMMs)?

Automated Market Makers in the context of decentralised finance are liquidity pools that that allow digital assets to be traded in a permissionless and automatic way rather than a traditional market of buyers and sellers.

How are AMMs and prediction markets related?

While AMM based digital asset exchanges have grown in popularity significantly, prediction markets have lagged behind. Part of the reason why is that liquidity providers are not adequately incentivised to provide liquidity to an AMM.

Why are LPs not incentivised to provide liquidity to prediction markets?

Prediction markets necessarily resolve to zero for all outcomes except one. This means that liquidity providers (LPs) are exposed to significant losses, as they are essentially betting that all market participants are wrong in their bets.

What are some solutions to the LP problem in prediction markets?

The AMM formula that is used for decentralised exchanges is not adequate for prediction markets. New methods should be explored that help financially incentivise liquidity providers.

Implementations of possible approaches

We implement two methods from academic literature in Solidity: the Logarithmic Market Scoring Rules and the Liquidity Sensitive Logarithmic Market Scoring Rules.